1. Competition Policy and Economic
Regulation in Georgia
By Ketevan Lapachi
22 May, 2012
Georgian Development Research Institute

2. Content
Part I: Economic regulation - from deregulation to
regulatory quality (2-11)
Part II. Competition Law and Policy (12-35)
 International rules and principles and Georgia’s
International obligations in field of competition
(12-13)
 EU and Georgia (14-19)
 Current situation: a) Competition Law in force and
b) Draft Competition Law (20-33)
 Future scenario: concept for reform (34)

3. Regulatory Policies and Institutions
 Objectives and typologies of economic regulation
 Rules and institutions
 Independent industry and competition regulators
(allocation of responsibilities, independence and
accountability)
 Relationship between utility and competition
regulators

4. Evolution of the Concept of Regulatory
Reform
International tendencies (1997-2005)
 From deregulation to regulatory quality
management
 Main elements and mechanisms of quality of
regulation
 Regulatory tools: administrative simplifications,
RIA, Transparency and communication,
alternatives to regulation, compliance and
enforcement, administrative justice and
accountability

5. Four dangerous regulatory “myth”
(Jacobs)
 We live in an age of deregulation
 Regulation is bad for businesses, so the less
regulation, the better
 Countries reform regulations because of
globalization forces them to reform
 Regulation is a means for governments to
control business behavior

6. Myths’ Corrections- some
considerations
 For a decade, Regulation has increased faster than any other
form of government activity
 Every indicator shows that regulatory state is growing , not
shrinking
 Market liberalization requires more regulation as markets
expand
 Private enterprises produce wealth within well regulated
competitive markets, within a framework of social welfare
 Changes is ownership is not enough
 Pure and inadequate regulatory structures permit abuses
and corruption, undermine investor and consumer
confidence and destroy rather than create economic value

7. Why regulatory framework is still major
constraint on growth in most transition
countries
 The reason is not that country regulate, but that they
regulate badly
 The problem is a mix over-regulation, under regulation,
and the wrong kind of regulation combined with
ineffective institutions to design, apply, and adjudicate
regulations
 Deregulation is insufficient principle for market reform
 Regulatory quality is the guiding principle
 We need smart government not small government
 Institutional reforms must strengthen both markets and
states

8. Characteristics needed for quality
regulatory systems
 Consistency with competition principles
 Security (legal security, predictable enforcement)
 Transparency
 Legitimacy (protect public interests)
 Efficiency
 Expertise
 Reducing regulatory risk is a key. Transparency and
regulatory impact analysis are considered as tools
for reducing regulatory risks.

9. Governments reform regulations because it is
in their domestic interests
 In general reforms are driven by purely domestic
needs
 Domestic benefits: boosts consumer benefits,
improves competitiveness, fosters innovation,
increases job creation, etc.
 Among the major results (according to
international practice) are: price reduction after
reforms, GDP growth, etc

10. Principles of Reform
 minimize the need of regulation by getting industry
structure right
 thoroughly access the design of the regulator in light of
the evolution of the industry/sector/economy
 adapt to changes
 establish close working relations with competition
authorities to preserve consistency in the economy wide
competition policy
 integrity of economic system, etc

11. Is the Georgian Regulatory Model
efficient?
 Independence debate
 conflict of interests
 coordination with competition policy
 aims of regulation, expected benefits and real situation
 cost- benefit issue
 major problems and infringements of consumers’ rights
in infrastructure sectors
 needs for policy reforms
 etc
 The role of competition policy in reform

12. International rules and principles
in competition
 The internationally acknowledged principles of
competition, amongst them the rules of state control over
business restricting practice (WTO, EU, OECD, UNSTAD)
oblige states to:
 Adopt
 Improve
 And efficiently implement the respective legal acts.
 Base their legislation on the principles of efficient
regulation and prevention of competition restricting
practices
 Ensure the non-discriminatory attitude to every enterprise
 Improve the enforcement measures

13. Georgia’s International
Commitments
 Georgia is pressing towards the integration into the
institutions of the European Union, it is a member of the
World Trade Organisation and also enjoys the status of a
full member or observer of many bilateral, regional or
multilateral agreements and international organisations.
 Consequently, Georgia has certain obligations in the light
of regulation of domestic legal framework for trade and
competition with due consideration of international
principles and best practice and first of all rules and
recommendations of the EU, WTO, UNCTAD, OECD.

14. EU and Georgia
 PCA (partnership and cooperation agreement with EC and
its member countries) 1996, article 44
 Free Trade agreement (FTA) and Neighborhood Policy
 EC Fact finding Mission (2009) and its recommendations
 DCFTA (Deep and Comprehensive Free Trade Agreement)
 Copenhagen Criterions (1993)

15. PCA Agreement, Article 44
 The Partnership and Cooperation Agreement between Georgia and the
EU and its member countries (1996) outlines key directions (Article 44),
which should be accorded particular attention in the course of
harmonisation of domestic competition law with that of the EU,
amongst them:
 “agreements and associations between undertakings and concerted
practices which may have the effect of preventing, restricting or
distorting competition,
 abuse by undertakings of a dominant position in the market,
 state aids which have the effect of distorting competition,
 state monopolies of a commercial character,
 public undertakings and undertakings with special or exclusive rights,
 review and supervision of the application of competition laws and
means of ensuring compliance with them.”

16. Four main policy areas of the EU
Competition Law include:
 Cartels, or control of collusion and other anti-competitive practices
which has an effect on the EU (or, since 1994, the
European Economic Area). This is covered under Article 101 of TFEU
(ex article 81 of the Treaty of the European Community (TEC).
 Monopolies, or preventing the abuse of firms' dominant market
positions. This is governed by Article 102 of TFEU (ex article 82 of
TEC). This article also gives rise to the Commission's authority under
the next area,
 Mergers, control of proposed mergers, acquisitions and joint ventures
involving companies which have a certain, defined amount of turnover
in the EU/EEA. This is governed by the Council Regulation 139/2004
EC (the Merger Regulation).
 State aid, control of direct and indirect aid given by
Member States of the European Union to companies. Covered under
Article 107 of TFEU (ex article 87 of TEC.

17. Competition authorities in the
acceding countries
 The enlargement of EU with the new members (as it was in May 2004)
provides new challenges and opportunities for cooperation. In order to
meet these challenges the accession process in the field of competition
aims to prepare the acceding countries for an active role in competition
enforcement.
 Negotiations are based on the conclusion of the Copenhagen European
Council (June 1993), which defined criteria that candidate countries
have to meet before than can join the EU.
 In the economic sphere these criteria require the existence of a
functioning market economy as well as the capacity to cope with
competitive pressure and market forces within the EU. “this criterion
of the accession negotiations into a principle whereby candidate
countries are seen as ready to join the EU only if their companies and
public authorities have became accustomed to a competition discipline
similar to that of the community well before the date of accession

18. Copenhagen Criteria
 three elements had to be in place in a candidate country before the
competition negotiations were concluded:
 a) the necessary legislative framework;
 b) an adequate administrative capacity (in particular a well functioning
competition authority) and
 c) a credible enforcement record of the competition acquis. In case of
new members these requirements were not only based on political
context of negotiations but also on the bilateral agreements that the
EU had concluded with each of the ten candidate countries from CE
and EEC. These agreements already provided a solid legal basis for
the accession preparation in the area of competition policy.

19. Main elements of competition
policy reforms
The foregoing puts forward the necessity of
improvement of competition policy in Georgia and
respectively, the care for the provision of such
elements, as:
 The existence of clear and predictable rules of
competition;
 Efficient state supervision over their observance;
 Reliable and transparent enforcement practice

20. Arguments for competition policy
 The best international practice treats competition as an
important factor of economic growth and public welfare.
 Strengthening of the competition policy is regarded as a
crucial direction of reforms in every country.
 The foregoing is proved both by the activities of
international organisations in this respect and the
competition regimes of more than 120 foreign countries and
the steps made towards their competition policy

21. Opposite opinion
there are some different opinions as well, that:
 The regulation of competition is an excessive and
purposeless bureaucratic burden; that it is not necessary
these days;
 The legislation is meaningless without efficient enforcement
and it will be better to revoke it;
 The regulation is an obstructing factor to the entry to any
market, innovations and the growth of local companies;
 etc.

22. Current Situation
 Commensurate with the agreement made with the
European Union and its member states Georgia has
committed itself to the approximation and
harmonisation of its legislation with that of the EU
Despite foregoing, Georgia’s law (of 2005) and policy
in competition and consumer protection:
 Does not take account of competition and
consumer protection related problems in Georgia
and the mechanisms of their solution within the
competition legislation.

23. Features of the law of 2005
 Unlike similar laws of the other countries (e.g. the laws of
the WTO, OECD and EU member countries, as well as
other countries), the Law on Free Trade and Competition
of 2005 does not apply to such manifestations of business
restricting practices, as anticompetitive agreements
monopolistic activity, concentration of market power
(mergers and acquisitions).
 The existing Law (2005) is unable to ensure the state control
in the following directions: concerted practices which aim
or have the effect of restricting competition, abuse of a
dominant position in the market, concentration of market
power.

24. Features of the Law of 2005
 the current competition law regulates only the
anticompetitive actions of the governmental
authorities with respect to state aid, prohibits the
discrimination of economic agents in the course of
issuance of state aids.
 however, the Law is so inconsistent in this respect
as well, that it excludes the efficient practical
implementation of these provisions.

25. Free Trade Agency during 2005-2012
 Since 2005, Georgian antimonopoly authority exists only nominally
(till 2010 as a subordinate entity of the Ministry of Economic
Development with its personnel consisting of only 5-6 persons and than
as an independent competition agency (was established in February of
2010).
 Due to deteriorated institutional capabilities this authority was
practically inactive.
 The signs of monopolization of the markets are already apparent
(examples of unfair competition, limited choice, monopolistic prices,
etc.), what in long run will have a negative impact on: the investment
image of the country; on the outcomes of economic development and
 on the process of joining the European Union (in particular, will
considerably protract the process).

26. Policy Fragmentation
 No legislative or administrative initiatives to improve
competition policy have been implemented for the past 10
years and moreover after the Rose Revolution, except for
the addition of rather strict provisions to the law of industry
regulation aiming at the restriction of the rights of the
Competition Agency and fragmentation of the competition
policy according to industry principle.
 There are no efficient coordination mechanisms for
ensuring the cooperation between and joint activities of
industry regulators and the Competition Agency.

27. Institutional reforms in 2010-2011
 February 26, 2010 by the decree of the President of Georgia
an independent legal entity of public law Free trade and
Competition Agency was set up
 From 2012 a legal entity of public law Competition and
State Procurement agency started functioning (according to
decree of Georgian Government December 27, 2011).
Prime minister
 In accordance with the competition strategy draft law on
competition was elaborated and submitted to the
parliament for consideration in September, 2011.
Discussions in 2011 and second hearing in February 29, of
2012.

28. Draft Competition Law (under
consideration)
 The draft law is still under consideration
 Discussions organized by the civic organizations (October 3,
2011, September 25, 2011, April 4, 2011 etc)
 Critical comments are provided by the NGO’s (TI Georgia,
GILA, GDRI and many independent experts).
 Some critical comments by Ketevan Lapachi are provided.
Full version of comments and suggestions is available (at
www.gdri.ge)

29. Advantages and major problem areas of the
draft law on competition
 General advantage is the structure of the draft law
– it contains all critical elements
 Major problems areas are:
 Scope of application (Articles 1, paragraphs 4, 5)
 Agreements of minor importance (article 8)
 Exemptions (articles 9,12)
 Prioritization of tasks by the Georgian Government
(Article 19)
 etc

30. Scope of Application
 Special attention should be paid to the scope of application of the
law and exemptions from forbidden anticompetitive agreements and
prioritization of tasks by government. Namely:
 According to the draft the scope of application is very limited
(Article1, paragraph 4). Free Economic Zones, small markets (with
share less then 0, 25% in GDP), goods and services for defense and
public safety, etc. are in exemptions. In addition, paragraph 5, of
the same article stipulates that all other laws prevail and
transitional provisions (article 35) exclude infrastructure industries
from law application.
 According to best practice, the general competition laws apply to all
sectors and products. To this end the law contradicts to all
recommendations and Georgia’s Comprehensive Strategy in
Competition Policy as well.

31. Exemptions
 Some individual and group exemptions are established by
the draft law, and in addition, the government is enabled to
establish additional exemptions and priorities. (Articles: 9,
para2 and 3, article 12 Para. 2/b,f, g, h, etc.)
 In accordance with international practice special
agreements are exempted according to so called de-minimis
rules. But this rule does not apply to the cartel agreements.
In addition, in spite of the same practice the benchmarks to
be established are to high and need to be revised

32. “De minimis” Rules
 According to draft law (Article 8) prohibition to the agreements shall
not apply
 “a) in case of horizontal agreements if aggregate market share of
parties does not exceed 25 %; b) in case of vertical agreements if
share on the relevant market of each party does not exceed 40 %
for each party; c) in case if agreement contains both characteristics
– aggregate share of parties does not exceed 40% “.
 Similar exemptions (“de-minimis” rules) are usual for competition
laws, but thresholds stipulated by the draft law are to high and
contradict to the international standards (for example in the EU and
its member countries similar benchmarks are established at the
level of 5-15 %.
 In addition, de minimis rules never apply to the cartel agreements


33. Article 19 and competition agency
independence
 Article 19 – prioritization of tasks by the Georgian Government is
absolutely different (it should be done by the agency but not
government) than traditional prioritization of tasks by competition
authorities.
 Does it mean that agency should respond only to government massages?
According to widespread opinion, to understand the implications of a
law, some standard policy analysis questions should be asked: who are
the affected parties; what are the market effects; what are the
administrative costs; how will Georgia’s international relations be
affected, etc..

34. Possible Future Scenarios
 challenges and problems
 old recommendations in new realities
 modern competition law and institution is needed
 clear competition rules and predictable
enforcement mechanisms need to be established
 designing efficient competition authority: main
elements
 enforcement regime
 etc.

35. Thank you for your attention
For comments: klapachi@ibsu.edu.ge
klapachi@yahoo.com